Are Insurance Companies Really as Eco-Friendly as Their Ratings Claim?
When you think of industries that are heavy polluters, you probably picture massive oil refineries, endless lines of exhaust-spewing traffic, or giant manufacturing plants.
You probably don’t picture an insurance company. After all, insurance companies mostly consist of people working in offices, crunching numbers, and analyzing risk.
Because of this, many major global insurance companies boast incredibly high Environmental, Social, and Governance (ESG) ratings. They look like absolute champions of sustainability on paper. But a new study published in the International Journal of Energy Economics and Policy by researchers Kirill Patyrykin and Lyudmila Vasyukova suggests that these glowing scores might be hiding a much darker reality.
It turns out that the way we measure corporate sustainability is deeply flawed, allowing financial giants to look green while continuing to fund and protect some of the world's biggest polluters.
To understand the problem, we first need to understand how companies are graded on their environmental impact. ESG ratings are designed to convert complicated sustainability details into simple scores that investors and the public can easily digest. These frameworks usually look at a company's announced policies, risk management, and environmental measures.
When evaluating emissions, the corporate world generally breaks them down into three categories:
Scope 1 refers to direct operational emissions, like the fuel burned by company vehicles.
Scope 2 covers indirect emissions from purchased energy, like the electricity used to power office buildings.
Scope 3 includes all other indirect emissions connected to a company's broader operations and supply chain.
For insurance companies, Scope 1 and Scope 2 emissions are incredibly low compared to manufacturing or energy companies. Their main sources of operational emissions are just office buildings, IT infrastructure, data centers, and employee business travel.
Because ESG rating systems often heavily focus on these direct, operational metrics, insurers look fantastic by comparison. They are frequently rewarded for straightforward efficiency gains, implementing paperless operations, and buying renewable energy for their headquarters. While these are positive steps, they completely mask the true magnitude of the insurance sector's environmental impact.
The Elephant in the Room: Scope 3 and "Indirect" Emissions
If an insurance company's office only produces a tiny amount of carbon, how are they harming the environment? The answer lies in Scope 3—specifically, in what is known as "insurance-associated emissions."
Insurance companies are essentially massive financial intermediaries. They have two primary ways of interacting with the global economy:
Underwriting: They provide the insurance policies that allow high-emission economic activities—like fossil fuel mining, power generation, aviation, shipping, and heavy industry—to operate. Without insurance, these risky and carbon-heavy projects simply could not go forward.
Investing: Insurers collect massive amounts of money in premiums, which they then invest in equities, bonds, and infrastructure. Unfortunately, a large portion of this capital is deployed into carbon-intensive sectors, resulting in huge amounts of "financed emissions".
In short, insurers act as "large carbon middlemen". Their choices about which projects to underwrite decide what gets built in the real world, and their investment choices dictate where billions of dollars flow.
Despite this massive influence, Scope 3 emissions are rarely represented well in ESG ratings. They are often poorly estimated or omitted entirely from the calculations. This exclusion unfairly portrays insurers as environmentally responsible while hiding their deep financial connections to climate-damaging practices.
Because the rules of the ESG game are currently broken, it has created an environment ripe for greenwashing. Greenwashing occurs when a company presents information in a way that gives a false impression of environmental responsibility. In the insurance world, this is often done by focusing on "symbolic" compliance rather than "substantive" action.
Symbolic Actions (Highly rewarded by ESG ratings):
Publishing extensive sustainability policies.
Making public commitments to reach "net-zero" emissions by a future date.
Running marketing campaigns focused on minor operational tweaks, like energy-efficient buildings.
Joining voluntary climate programs.
Substantive Actions (Often ignored by ESG ratings):
Actually quantifying and reducing insured emissions.
Divesting from high-carbon assets.
Implementing strict underwriting requirements that exclude fossil fuels.
The rating agencies themselves are a major part of the problem. Different ESG providers use highly inconsistent scoring models, indicators, and weighting systems.
This means that one agency might give an insurer a brilliant ESG score, while another gives the exact same company a terrible one. Researchers call this "aggregate confusion," a phenomenon that blurs underlying environmental risks and makes it incredibly difficult to compare companies accurately.
Furthermore, ESG ratings suffer from a massive "disclosure premium". The systems often reward the mere format and complexity of a sustainability report rather than the actual state of the environment. This encourages insurers to invest heavy amounts of money into their reporting infrastructure and public relations narratives, rather than changing their actual investment and underwriting behaviors. Ultimately, firms that are great at communicating can score higher than firms doing meaningful, but less visible, environmental work.
This isn't just an accounting issue; this disconnect has massive real-world implications. Empirical evidence shows that the optimistic sustainability claims of the insurance sector are highly questionable.
For instance, civil society groups have exposed that major insurers—such as Lloyds, Generali, AIG, and Zurich—continue to engage in widespread fossil fuel underwriting and investment practices. While some companies have introduced policies to exclude certain types of coal or tar sands, these bans are often highly selective, restricted to certain regions, or slow to be implemented.
Meanwhile, climate change is already hitting the insurance industry's bottom line. Large reinsurers like Swiss Re and Munich Re report that climate-related losses from extreme weather and natural disasters are steadily increasing. These losses directly harm the profitability and capital of insurers, proving that climate change is a massive financial risk. Yet, despite this direct threat to their own survival, most insurers continue to back high-emitting sectors.
When ESG ratings fail to capture this reality, the consequences ripple across the global economy:
Mispricing Risk: Investors are given a false sense of security, causing them to misprice the true financial risks associated with climate change.
Misdirected Capital: Money continues to flow toward companies that are labeled "sustainable" without them actually producing positive environmental effects.
Erosion of Trust: As the gap between high ESG scores and real-world pollution becomes obvious, the public and investors lose faith in sustainable finance frameworks entirely.
Regulators and the Path Forward
The good news is that the world is starting to wake up to these flaws. There is an increasing regulatory push to hold financial institutions accountable for their indirect environmental impacts.
Frameworks like the Partnership for Carbon Accounting Financials (PCAF) have been specifically designed to measure financed and insured emissions, forcing accountability over this crucial operational scope. Regulatory bodies worldwide—including the International Association of Insurance Supervisors (IAIS), the EU’s Sustainable Finance Disclosure Regulation, and the UK Prudential Regulation Authority—are placing a much heavier focus on climate risk management.
These institutions are slowly pushing for a transition toward recognizing indirect environmental responsibility. NGOs and civil society groups are also playing a crucial role by publicly benchmarking insurers and exposing their ongoing exposure to fossil fuels, creating much-needed reputational pressure.
However, the researchers note that these current reforms are simply not adequate. Because many of these initiatives rely on voluntary participation and suffer from weak enforcement, efforts to regulate underwriting emissions remain severely limited. If regulatory momentum continues without compulsory and standardized reporting of Scope 3 emissions, it will likely just encourage more symbolic compliance rather than forcing real environmental change.
